In an ideal business world, most marketers would prefer to handle all their distribution activities by way of the corporate channel arrangement we discussed in the Distribution Decisions Tutorial. Such an arrangement provides the marketer with two important benefits. First, being responsible for all distribution means the marketing organization need only worry about making decisions concerning their product. When others, such as resellers, are involved in distribution attention is not given to a single supplier but is stretched across all products the reseller carries. Second, having control on all distribution means the marketer is always in direct contact with buyers of their products, which can make it easier to build strong, long-term relationships with customers.
Unfortunately, as we saw in the Distribution Decisions Tutorial, for many marketing organizations a corporate channel arrangement is not feasible. Whether due to high cost or lack of experience needed to run a channel efficiently, the majority of marketing organizations rely on third parties to get their products into the hands of customers.
In the next two sections of the Principles of Marketing Tutorials, we examine the key parties through which marketers seek distribution assistance. Choosing which parties to aid in product distribution is important since a distributor’s actions can affect how customers view the marketer and the products they offer. As we discussed in the Targeting Markets Tutorial, a customer’s perception of a product affects how they mentally position the product in relation to competitive products. How a product is distributed, including where it is located (e.g., reputation of resellers selling the product) and customer experience when purchasing (e.g., condition of product when received from a reseller), may impact a customer’s feelings about the product which in turn affects how a customer positions the product in their mind.
In this tutorial, we examine retailers as resellers of a marketer’s products. In terms of sales volume and number of employees, retailing is one of the largest sectors of most economies. We will see that retailing is quite diverse and marketers, who want to distribute through retailers, must be familiar with the differences that exist among different retail options.
What is Retailing?
Retailing is a distribution channel function where one organization buys products from supplying firms or manufactures the product themselves, and then sells these directly to consumers. A retailer is a reseller (i.e., obtains product from one party in order to sell to another) from which a consumer purchases products. According to the 2017 U.S. Economic Census for Retail Trade, in the U.S. alone there are over 1 million retail outlets that generate over $5 trillion in annual sales and employ nearly 16 million.
In the majority of retail situations, the organization from which a consumer makes purchases is a reseller of products obtained from others and is not the product manufacturer. But as we discussed in the Distribution Decisions Tutorial, some manufacturers also operate their own retail outlets in a corporate channel arrangement. While consumers are the retailer’s buyers, a consumer does not always buy from retailers. For instance, when a consumer purchases from another consumer (e.g., eBay), the consumer purchase would not be classified as a retail purchase. This distinction can get confusing but in the U.S. and other countries, the dividing line is whether the one selling to consumers is classified as a business (e.g., legal and tax purposes) or is selling as a hobby without a legal business standing.
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Benefits of Retailers
As a reseller, retailers offer many benefits to suppliers and customers as we discussed in the Distribution Decision Tutorial. The major benefits for each include:
Access to Customers
For suppliers, the most valuable benefits provided by retailers are the opportunities they offer for reaching the supplier’s target market, building product demand through retail promotions, and providing consumer feedback. The knowledge and skills offered by retailers are key for generating sales, profits, and customer loyalty for suppliers.
Access to Product
For consumers, the most significant benefits offered by retailers relate to the ability to purchase products that may not otherwise be easily available if the consumers had to deal directly with product suppliers. In particular, retailers provide consumers with the ability to purchase small quantities of a wide assortment of products at prices that are considered reasonably affordable. Additionally, when it comes to retailers with physical locations (e.g., retail store), these are likely to be located near the retailer’s target market; thereby, enabling consumers to make purchases and take home the product much more conveniently than if they had to visit a product supplier’s facility or wait for an internet purchase to be delivered.
Ways to Categorize Retailers
There are many ways to categorize retailers depending on the characteristics being evaluated. For our purposes we will separate retailers based on six factors directly related to major marketing decisions:
- Target Markets Served
- Product Offerings
- Distribution Method
- Pricing Structure
- Promotional Focus
- Service Level
and one operational factor:
- Ownership Structure
However, these groups are not meant to be mutually exclusive. In fact, in some way all retailers can be placed into each category.
1. Target Markets Served
The first classification looks at the type of markets a retailer intends to target. These categories are identical to the classification scheme we saw in the Distribution Decisions Tutorial when we discussed the levels of distribution coverage.
Mass market retailers appeal to the largest market possible by selling products of interest to nearly all consumers. With such a large market from which to draw customers, the competition among these retailers is often fierce.
Retailers categorized as servicing the specialty market are likely to target buyers looking for products having certain features that go beyond mass marketed products, such as customers who require more advanced product options or higher level of customer service. While not as large as the mass market, the target market serviced by specialty retailers can be sizable.
Appealing to this market means appealing to discriminating customers who are often willing to pay a premium for features found in very few products and for highly personalized services. Since this target market is small, the number of retailers addressing this market within a given geographic area may also be small.
2. Product Offerings
Under this classification, retailers are divided based on the width (i.e., number of different product lines) and depth (i.e., number of different products within a product line) of the products they carry.
These retailers carry a wide range of product categories (i.e., broad width), though the number of different items within a particular product line is generally limited (i.e., shallow depth).
Multiple Lines Specialty Merchandisers
Retailers classified in this category stock a limited number of product lines (i.e., narrow width). However, within the categories they handle, they often offer a greater selection (i.e., extended depth) than is offered by general merchandisers. For example, a consumer electronics retailer, such as Best Buy, would fall into this category.
Single Line Specialty Merchandisers
Some retailers limit their offerings to just one product line (i.e., very narrow width), and sometimes only one product (i.e., very shallow depth). This can be seen online where a relatively small website may sell a single product, such as computer gaming software. Another example may be a small jewelry store that only handles watches.
3. Distribution Method
Retailers sell in many different formats with some requiring consumers visit a physical location while others sell to customers in a virtual space. It should be noted that many retailers are not tied to a single distribution method but operate using multiple methods.
By far the predominant method consumers use to obtain products is to acquire these by physically visiting retail outlets (a.k.a. brick-and-mortar). Store outlets can be further divided into several categories. One key characteristic that distinguishes categories is whether retail outlets are physically connected to one or more others stores:
Stand-Alone – These are retail outlets that do not have other retail outlets connected.
Strip-Shopping Center – A retail arrangement with two or more outlets physically connected or that share physical resources (e.g., share parking lot).
Shopping Area – A local center of retail operations containing many retail outlets that may or may not be physically connected but are in close proximity to each other, such as a city shopping district.
Regional Shopping Mall – Consists of a large self-contained shopping area with many connected outlets.
Under this approach, retailers sell products to customers who do not physically visit a retail outlet. In fact, in many cases customers make their purchase from within their own homes.
Online Sellers – The fastest growing retail distribution method allows consumer to purchase products via the internet and mobile devices. In most cases, delivery is then handled by a third-party shipping service. However, other delivery options may require customers to pick up their order at a retail store or a lockbox.
Direct Marketers – Retailers that are principally selling via direct methods may have a primary location that receives orders but does not host shopping visits. Rather, orders are received via mail or phone.
Vending – While purchasing through vending machines does require the consumer to physically visit a location, this type of retailing is considered as non-store retailing as the vending operations are not located at the vending company’s place of business.
4. Pricing Strategy
Retailers can be classified based on their general pricing strategy. Retailers must decide whether their approach is to use price as a competitive advantage or to seek competitive advantage in non-price ways.
Discount retailers are best known for selling low-priced products having a low profit margin (i.e., price minus cost). To make profits these retailers look to sell in high volume. Typically discount retailers operate with low overhead costs by vigorously controlling operational spending on such things as real estate (e.g., location of retail outlet), design issues (e.g., store layout, website presentation), and by offering fewer services to their customers.
The objective of some retailers is not to compete on price but alternatively not to be seen as charging the highest price. These retailers, who often operate in specialty markets, aggressively monitor the market to insure their pricing is competitive but they do not desire to get into price wars with discount retailers. Thus, other elements of the marketing mix (e.g., higher quality products, more attractive store setting) are used to create higher value for which the customer will pay more.
Retailers targeting exclusive markets find such markets are far less price sensitive than mass or specialty markets. In these cases, the additional value added through increased operational spending (e.g., expensive locations, more attractive design, more services) justify higher retail prices. While these retailers are likely to sell in lower volume than discount or competitive pricing retailers, the profit margins for each product are often much higher.
5. Promotional Focus
Retailers generate customer interest using a variety of promotional technique, yet some retailers rely on certain methods more than others as their principle promotional approach. Promotional options used by retailers include:
Many store-based retailers continue to spend on traditional mass promotional methods of advertising, such as television and newspapers, though their use of internet and mobile advertising, including website, app and email ads, is growing. As would be expected, internet and mobile advertising methods are used extensively by online sellers
A particular form of advertising that many retailers use for the bulk of their promotion is direct mail – advertising through postal mail. Using direct mail for promotion is the primary way catalog retailers distribute their materials and is often utilized by smaller local companies who promote using postcard mailings.
Retailers use short-term promotions, called sales promotion, to encourage customers to undertake certain activity, such as making a purchase or visiting a store (for more see Types of Sales Promotion Tutorial). One common type of sales promotion is the issuing of rewards cards offering special discounts or cash back for reaching predefined purchase levels.
Retailers selling expensive or high-end products (e.g., automobiles) find a considerable amount of their promotional effort is spent in person-to-person contact with customers. While many of these retailers use other promotional methods, in particular advertising, the consumer-salesperson relationship is key to persuading consumers to make purchase decisions.
6. Service Level
Retailers attract customers not only with desirable products and affordable prices, but also by offering services that enhance the purchase experience. There are at least three levels of retail service which iclude:
This service level allows consumers to perform most or all of the services associated with retail purchasing. For some consumers self-service is considered a benefit while others may view it as an inconvenience. Self-service can be seen with: 1) self-selection services, such as online purchasing and vending machine purchases, and 2) self-checkout services where the consumer may get help selecting the product but they use self-checkout stations to process the purchase including scanning and payment.
The majority of retailers offer some level of service to consumers. Service includes handling the point-of-purchase transaction, product selection assistance, arrange payment plans, offer delivery, and many more.
The full-service retailer attempts to handle nearly all aspects of the purchase to the point where all the consumer does is select the item they wish to purchase. Retailers that follow a full-price strategy often follow the full-service approach as a way of adding value to a customer’s purchase.
7. Ownership Structure
Finally, we can categorize retailers based on the ownership structure of the business.
Individually Owned and Operated
Under this ownership structure, an individual or corporate entity owns and operates one or a very small number of outlets or single online store. Single ownership of retail outlets most frequently occurs with small retail stores, though there are some cases, for instance in the furniture industry, where single ownership involves very large outlets.
A retail chain consists of multiple retail outlets owned and operated by a single entity all performing similar retail activities. While the number of retail outlets required to be classified as a chain has never been specified, we will assume that any business owning more than five retail locations would be considered a chain.
This classification covers large retailers operating less than five locations, such as automotive dealers, beauty salons or furniture stores, and those operating in the non-store retail arena, such as online, catalog, and vending companies.
Contractually Licensed and Individually Operated
The contractual channel arrangement discussed in the Distribution Decisions Tutorial has lead to a retail ownership structure in which operators of the retail outlet are not the out-right owners of the business. Instead, the arrangement often involves a legal agreement in which the owner of the retail concept allows the operator to run the owner’s business concept in exchange for financial considerations, such as a percentage of revenue. This structure is most often seen in retail franchising.
Now that we have presented ways in which retailers can be classified, we now use these categories to distinguish general formats or business models that best describe retail operations. These categories are designed to identify the primary format a retailer follows. In some cases, particularly with the advent of the internet, a retailer will be involved in more than one format.
Represent the small, individually owned and operated retail outlet. In many cases these are family-run businesses catering to the local community often with a high level of service but relatively small product selection.
These retailers can be either general or specialty merchandisers but either way their main focus is on offering discount pricing (e.g., Walmart). Compared to other store types, mass discounters offer fewer services and lower quality products.
This retail format is best represented by a small store carrying very specialized and often high-end merchandise. In many cases a boutique is a full-service retailer following a full-pricing strategy.
A step above the boutique store is the specialty store, which is generally represented by mid-sized stores carrying more depth than boutique stores (e.g., Michaels). The service level of specialty stores is not as focused as it is with boutiques, though customer service is a key element to their success.
Many major retail chains have taken what were previously narrowly focused, small specialty store concepts and have expanded them to create large specialty stores. These so-called “category killers” can be found in such specialty areas as electronic (e.g., Best Buy), office supplies (e.g., Staples), and sporting goods (e.g., Dick’s Sporting Goods).
These retailers are general merchandisers offering mid-to-high quality products and strong level of services, though in most cases these retailers would not fall into the full-service category. While department stores are classified as general merchandisers, some carry a more selective product line. For instance, while Sears once carried a wide range of products from hardware to cosmetics, Nordstrom focuses their products on clothing and personal care products.
This is a form of mass discounter that often provides even lower prices than traditional mass discounters. In addition, they may require buyers to make purchases in quantities that are greater than what can be purchased at mass discount stores. These retail outlets provide few services and product selection can be limited. Furthermore, the retail design and layout is as the name suggests, warehouse style, with consumers often selecting products off the ground from the shipping package. Some forms of warehouse stores, called warehouse clubs (e.g., Costco), require customers purchase memberships in order to gain access to the outlet.
Many retailers, including well-known American retailers Lands’ End and LL Bean, have built their business by having customers place orders after seeing products that appear in a mailed catalog. Orders are then delivered by a third-party shipper.
As the name implies, these general merchandise retailers cater to offering customers an easy purchase experience. Convenience is offered in many ways including through easily accessible store locations, small store size that allows for quick shopping, and fast checkout. The product selection offered by these retailers is very limited and pricing can be high.
As noted in the Distribution Decisions Tutorial, a franchise is a form of contractual channel in which one party, the franchisor, controls the business activities of another party, the franchisee. Under these arrangements, an eligible franchisee agrees to pay for the right to use the franchisor’s business methods and other important business aspects, such as the franchise name. For instance, McDonald’s is a well-known franchisor that allows individuals to use the McDonald’s name and methods to deliver food to consumers. Payment is usually in the form of a one-time, upfront franchise fee and also on-going percentage of revenue. While the cost to the franchisee may be quite high, this form of retailing offers several advantages including: 1) allowing the franchisee to open a retail outlet that may already be known to local customers, and 2) being trained in how to operate the business, which may allow the franchisee to be successful much faster than if they attempted to start a business on their own. For the franchisor, in addition to added revenue, the franchise model allows for faster expansion since funds needed to grow the business (e.g., acquiring retail space, local advertising) are often supported by the franchisee’s up-front franchise fee.
Possibly the most publicized retail model to evolve in the last 50 years is the retailer that principally sells via the internet. There are thousands of online-only retail sellers of which Amazon is the most famous. These retailers offer shopping convenience including being open for business all day, every day. Electronic retailers or e-tailers also have the ability to offer a wide selection of product since all they really need in order to attract orders is a picture and description of the product. That is, they may not need to have the product on-hand the way physical stores do. Instead, an e-tailer can wait until an order is received from their customers before placing their own order with their suppliers. This cuts down significantly on the cost of maintaining an inventory of products.
Within this category are self-service methods for allowing consumers to make purchases and quickly acquire products. Today’s vending machines are highly automated and many are supported by either internet or telecommunications access, which permits consumers to purchase using credit and debit cards. While most consumers are well aware of vending machines allowing customers to purchase smaller items, such as beverages and snack foods, newer devices are entering the market containing more expensive and bulkier products.
Retailer Summary Chart
Below we summarize each retail format by using the seven retailer categorization characteristics. The characteristics identified for each format should be viewed as the “most likely” case for that format and are not necessarily representative of all retailers that fall into this format. For example, under distribution, clearly most retailers today have an online presence, however, for many the predominant distribution methods is still selling through retail stores.
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Concerns of Retailers
While much of the discussion in this tutorial deals with the role of retailers in the marketing strategy for consumer products companies, it is necessary to understand the concerns of retailers as they face their own marketing challenges. Among the marketing issues facing retailers are:
Retailers know that satisfied customers are loyal customers. Consequently, retailers must develop strategies intended to build relationships that result in customers returning to make more purchases.
Acquiring the Right Products
Customers will only be satisfied if they can purchase the right products to satisfy their needs. Since a large percentage of retailers do not manufacture their own products, they must seek suppliers who will supply products demanded by customers. Thus, an important objective for retailers is to identify the products customers will demand and negotiate with suppliers to obtain these products.
Once obtained products must be presented or merchandised to customers in a way that generates interest. Retail merchandising often requires hiring creative people who understand and can relate to the market. This is often accomplished with creative in-store displays, website videos, useful apps, and catalog images.
Like any marketer, retailers must use promotional methods to build customer interest. For retailers, a key measure of interest is the number of people visiting a retail location, visiting a website or using the retailer’s app. Building “traffic” is accomplished with a variety of promotional techniques, including advertising, and specialized promotional activities, such as coupons.
For store-based retailers, a store’s physical layout is an important component in creating a retail experience that will attract customers. The physical layout is more than just deciding in what part of the store to locate products. For many retailers, designing the right shopping atmosphere (e.g., objects, light, sound) can add to the appeal of a store. Layout is also important in the online world where site navigation and mobile app functionality may be deciding factors in whether of a retail website is successful.
Where to physically locate a retail store may help or hinder store traffic. Well-placed stores with high visibility and easy access, while possibly commanding higher land usage fees, may hold significantly more value than lower cost sites that yield less traffic. Understanding the trade-off between costs and benefits of locations is an important retail decision.
Keeping Pace With Technology
Technology has invaded all areas of retailing, including customer knowledge (e.g., customer relationship management software), product movement (e.g., use of RFID tags for tracking), point-of-purchase (e.g., scanners, kiosks, self-serve checkout), web and mobile technologies (e.g., online shopping carts, purchase recommendations) and many more. Because adopting technology can potentially lead to having a competitive advantage, it is important retailers pay close attention to technologies impacting their market.